Interest rates likely to fall regardless of any Brexit

Michael Saunders, a Bank of England (BoE) policymaker, has said that regardless of what direction Brexit does or doesn’t take in the coming months, the Bank is already considering cutting interest rates.

Interest rates in the UK have been on hold at 0.75 per cent since August 2018, when they increased from 0.5 per cent following a historic period of low inflation.

The Bank has said several times that Brexit uncertainty meant the UK economy was performing below its potential.

But addressing businesses, Michael Saunders said: “If the UK avoids a no-deal Brexit, monetary policy also could go either way and I think it is quite plausible that the next move in Bank Rate would be down rather than up.”

He added that even without a no-deal Brexit, high levels of uncertainty surrounding the UK’s departure from the EU could act as a “slow puncture” for the economy.

He said: “In this case, it might well be appropriate to maintain a highly accommodative monetary policy stance for an extended period and perhaps to loosen policy at some stage, especially if global growth remains disappointing.”

In light of his comments and the actions of the BoE, many financial experts are predicting a 64 per cent chance of a cut by the middle of next year.

Gertjan Vlieghe, a member of the Bank’s Monetary Policy Committee, has also recently raised the prospect of further cuts to interests rates. He said: “A scenario of entrenched Brexit uncertainty is likely to keep economic growth below potential, and require some monetary stimulus.

“’We are not at the point where monetary policy has run out of ammunition, but the risk of that happening in the future has clearly risen relative to the pre-crisis period.”

However, he did strike a more positive note saying that if a deal could be agreed by Parliament at some point in the near future – which would now have to take place after the upcoming general election – “any future changes in the UK-EU trading relationship might yet stimulate investment sufficiently to prevent the need for easier monetary policy, and put gradual and limited rate hikes back on the agenda, eventually.”